Türkiye Finans Katılım Bankası Anonim Şirketi

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2 Türkiye Finans Katılım Bankası Anonim Şirketi TABLE OF CONTENTS Page Independent auditors report Consolidated statement of financial position 1 Consolidated statement of profit or loss and other comprehensive income 2 Consolidated statement of changes in equity 3 Consolidated statement of cash flows 4 Notes to the consolidated financial statements 5 58

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4 Consolidated Statement of Financial Position As at 30 June 2014 Notes 30 June December 2013 Assets Cash and balances with Central Bank 13 3,028, ,398 Loans and advances to banks , ,203 Loans, lease receivables and advances to customers 15 20,269,967 18,200,352 Derivative assets held for trading 16 27,077 46,669 Available-for-sale investment securities 17 1,610,787 1,413,025 Held-to-maturity investment securities ,358 - Property and equipment , ,689 Intangible assets 18 35,130 37,149 Deferred tax assets 12 31,110 32,412 Other assets 19 3,768,440 3,227,187 Total assets 29,915,576 25,047,084 Liabilities Deposits from banks , ,617 Deposits from customers 21 16,802,365 14,818,621 Funds borrowed 22 5,227,153 4,813,322 Debt securities issued 22 2,771,173 1,074,246 Derivative liabilities held for trading 16 15,773 39,140 Provisions , ,503 Current tax liabilities 12 27,382 13,043 Other liabilities 24 1,694,047 1,213,312 Total liabilities 27,134,198 22,469,804 Equity Share capital 25 1,775,000 1,775,000 Reserves 179, ,056 Retained earnings 826, ,224 Total shareholders' equity 2,781,378 2,577,280 Total liabilities and shareholders' equity 29,915,576 25,047,084 The notes on pages 5 to 58 are an integral part of these financial statements. 1

5 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the Six-Month Period Ended 30 June 2014 Notes For the six month period ended 30 June 2014 For the six month period ended 30 June 2013 Profit share income: Income on loans 900, ,836 Income on investment securities 59,569 26,409 Income on deposits at banks Income on financial leases 37,529 15, , ,690 Profit share expense: Expense on deposits (360,493) (268,605) Expense on borrowings (96,300) (47,200) Others (35,986) (8,159) (492,779) (323,964) Net profit share income 504, ,726 Fee and commission income 7 109,490 83,426 Fee and commission expense 7 (36,815) (22,698) Net fee and commission income 72,675 60,728 Net trading income 8 (10,810) 12,313 Other operating income 9 27,909 24,658 Foreign exchange gain, net 27,486 21,493 Other operating income 44,585 58,464 Total operating income 621, ,918 Personnel expenses 10 (190,419) (155,960) Administrative expenses (91,125) (68,363) Net impairment loss on financial assets 15, 23 (61,226) (80,619) Depreciation and amortisation 18 (25, 369) (17,417) Taxes and duties other than on income (14,043) (10,875) Other operating expenses 11 (32,969) (19,818) Total operating expenses (415,151) (353,052) Profit before tax 206, ,866 Income tax expense 12 (40,299) (36,415) Net profit for the period 166, ,451 Other comprehensive income Items that will never be reclassified to profit or loss Net change in remeasurements of defined benefit liability - - Net change in revaluation of tangible assets - - Related tax - - Items that are or may be reclassified to profit or loss Net change in fair values of available-for-sale financial assets 25 46,216 (31,055) Net amount transferred to profit or loss Related tax 25 (9,436) 6,184 Other comprehensive income for the period, net of tax 37,742 (24,738) Total comprehensive income 204, ,713 The notes on pages 5 to 58 are an integral part of these financial statements. 2

6 Consolidated Statement of Changes in Equity For the Six-Month Period Ended 30 June 2014 Notes Share capital Fair value reserve Revaluation reserve Other reserves Retained earnings Total Balances at 1 January ,650,000 6,901 89,615 58, ,988 2,179,587 Total comprehensive income for the period Net profit of the period , ,451 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of tax 25 - (24,871) (24,871) Net amount transferred to profit or loss Net change in revaluation of tangible assets, net of tax Total other comprehensive income - (24,738) (24,738) Total comprehensive income for the period - (24,738) , ,713 Transactions with the owners, recorded directly in equity Transfers to other reserves ,153 (14,153) - Transfers to share capital Share capital increase 125, ,000 Balances at 30 June ,775,000 (17,837) 89,615 72, ,286 2,430,300 Balances at 1 January ,775,000 (36,795) 89,615 72, ,224 2,577,280 Total comprehensive income for the period Net profit of the period , ,356 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of tax 25-36, ,780 Net change in actuarial gain/(loss) related to employee benefits, net of tax Net amount transferred to profit or loss Net change in revaluation of tangible assets, net of tax Total other comprehensive income - 37, ,742 Total comprehensive income for the period - 37, , ,098 Transactions with the owners, recorded directly in equity Transfers to other reserves ,590 (16,590) - Balances at 30 June ,775, ,615 88, ,990 2,781,378 The notes on pages 5 to 58 are an integral part of these financial statements. 3

7 Consolidated Statement of Cash Flows For the Six-Month Period Ended 30 June 2014 Notes For the six month period ended 30 June 2014 For the six month period ended 30 June 2013 Cash flows from operating activities: Profit for the period 166, ,451 Adjustments for: Depreciation and amortisation 18 25,369 17,417 Net impairment loss on financial assets 15, , ,046 Net change in fair value of derivative instruments held for trading 16 18,833 (1,370) Provision for employee benefits 23 20,969 15,919 Provision for litigation and claims 23 2,208 1,421 Other provision expenses Net profit share income (504,546) (420,726) Income tax expense 12 40,299 36,415 (104,077) (85,149) Change in loans, leasing receivables and advances to customers (2,105,103) (2,686,708) Proceeds from funds borrowed 2,356,428 2,329,005 Repayment of funds borrowed (1,857,852) (1,460,785) Change in other assets (967,572) (611,325) Change in deposits from banks 108,676 (189,059) Change in deposits from customers 1,979,039 2,086,231 Change in other liabilities 369,988 (589,508) (220,473) (1,207,298) Profit share income received 944, ,514 Profit share expense paid (465,138) (304,549) Income tax paid 12 (34,172) (39,589) Net cash provided from / (used in) operating activities 224,575 (821,922) Cash flows from investing activities: Acquisition of available-for-sale investment securities (190,005) (446,258) Proceeds from sale of available-for-sale investment securities 40,511 56,520 Acquisition of property and equipment 18 (173,559) (8,719) Proceeds from the sale of property and equipment 1,338 3 Acquisition of intangible assets 18 (8,254) (5,209) Net cash used in investing activities (329,969) (403,663) Cash flows from financing activities: Proceeds from issue of ordinary shares - 125,000 Proceeds from issue of debt securities 1,689, ,450 Net cash provided from financing activities 1,689, ,450 Net increase / (decrease) in cash and cash equivalents 1,584,454 (226,135) Cash and cash equivalents at 1 January 13 1,878,601 1,599,964 Effect of exchange rate fluctuations on cash held (22,642) 178,837 Cash and cash equivalents at 30 June 13 3,440,413 1,552,666 The notes on pages 5 to 58 are an integral part of these financial statements. 4

8 Notes to the consolidated financial statements Page Note 1 Overview of the Participation Bank 6 Note 2 Basis of preparation 7 Note 3 Significant accounting policies 10 Note 4 Financial risk management 22 Note 5 Use of estimates and judgements 36 Note 6 Operating segment 39 Note 7 Net fee and commission income 41 Note 8 Net trading income 41 Note 9 Other operating income 41 Note 10 Personnel expenses 42 Note 11 Other operating expenses 42 Note 12 Income taxes 42 Note 13 Cash and cash equivalents 44 Note 14 Loans and advances to banks 44 Note 15 Loans, lease receivables and advances to customers 45 Note 16 Derivative financial instruments held for trading 47 Note 17 Investment securities 48 Note 18 Property and equipment and intangible assets 49 Note 19 Other assets 51 Note 20 Deposits from banks 51 Note 21 Deposits from customers 51 Note 22 Funds borrowed and debt securities issued 52 Note 23 Provisions 53 Note 24 Other liabilities 54 Note 25 Capital and reserves 55 Note 26 Related party transactions 56 Note 27 Commitments and contingencies 57 Note 28 Group subsidiaries 57 Note 29 Operating leases 57 Note 30 Events after the reporting period 58 5

9 1. Overview of the Participation Bank 1.1. Brief history Türkiye Finans Katılım Bankası AŞ (the Participation Bank ) was established in accordance with the Provision on Establishment of Participation Banks of Decree No. 83/7506 dated 16 December The Participation Bank (formerly; Anadolu Finans Kurumu AŞ) obtained permission from the Central Bank of Turkey on 24 October 1991 and commenced operations on 4 November In accordance with the resolution in the board meeting of Anadolu Finans Kurumu AŞ numbered 1047, on 31 May 2005 a merger between the Participation Bank and Family Finans Kurumu AŞ was decided. All the assets, liabilities and also off-balance sheet liabilities of Family Finans Kurumu AŞ were transferred to Anadolu Finans Kurumu AŞ during the merger. With the resolution dated 20 October 2005 and numbered 1726 by Banking Regulation and Supervision Agency ( BRSA ), the transfer agreement, signed by the boards of directors of Anadolu Finans Kurumu AŞ and Family Finans Kurumu AŞ and modified draft of main contract of Anadolu Finans Kurumu AŞ were approved. The registry on the decision regarding the merger which was concluded in the general assemblies of both participation banks on 23 December 2005 was approved by BRSA s resolution dated 28 December 2005, and numbered In accordance with BRSA s resolution dated 30 November 2005, and numbered 1747 related to the merger of both participation banks, the title was changed into Türkiye Finans Katılım Bankası AŞ providing that required permission be given by the Council of Ministers within the framework of the 48 th article of the Turkish Commercial Law. The new title was registered by the Turkish Trade Registry of Istanbul on 30 December 2005 in compliance with the Turkish Commercial Law numbered The Participation Bank operates in accordance with the principles of interest-free banking and Islamic rules as a participation bank, by collecting funds through current accounts and profit sharing accounts and lending such funds through 267 branches with 4,397 employees as at 30 June The Participation Bank s head office is located at Adnan Kahveci Caddesi No: Yakacık Kartal/ Istanbul Ownership With the authorisation of BRSA, numbered 2489 and dated 28 February 2008, 60% of the Participation Bank was acquired by the National Commercial Bank. The Participation Bank increased its capital from TL 292,047 to TL 800,000 with the share capital increase in As per the decision taken by the extraordinary General Assembly on 6 June 2012, the Participation Bank s share capital was increased by TL 975,000 from TL 800,000 to TL 1,775,000. The part of this increase amounting to TL 700,000 was transferred from retained earnings and the part amounting to TL 150,000 was paid in cash by shareholders on 2 October The remaining part of the cash commitment amounting to TL 125,000 was paid by shareholders and approved by the Banking Regulation and Supervision Agency on 6 February As at 30 June 2014, the shareholders are as follows; the National Commercial Bank holds 66.27%, Boydak Group holds 22.09%, Ülker Group holds 11.57% and other shareholders hold 0.07%. The Participation Bank is controlled by the National Commercial Bank. The National Commercial Bank (NCB) established as the first and the biggest bank of Saudi Arabia. The Bank is performing its banking operations through cross-border in Bahrain and Lebanon. The head quarter of the NCB is located in Jeddah. 6

10 1. Overview of the Participation Bank (continued) 1.2. Ownership (continued) As at 30 June 2014, the Participation Bank s paid-in-capital consists of 1,775,000 shares of TL 1 nominal each. As at 30 June 2014 and 31 December 2013, the composition of shareholders and their respective percentage of ownership can be summarised as follows: 30 June December 2013 Amount % Amount % The National Commercial Bank JSC 1,176, ,176, Boydak Group 392, , Gözde Girişim Sermayesi Yatırım Ortaklığı AŞ (Ülker Group) 205, , Other shareholders 1, , Total 1,775, ,775, Basis of preparation 2.1. Statement of compliance The Participation Bank located in Turkey maintains its books of account and prepare its statutory financial statements in Turkish Lira ( TL ), the functional currency of the Participation Bank, in accordance with the accounting practices as promulgated by the Banking Regulation and Supervision Agency ( BRSA ). The accompanying financial statements of the Participation Bank have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The Participation Bank adopted all IFRSs, which were mandatory as at 30 June The accompanying financial statements are authorised for issue by the Participation Bank s Management on 5 August Basis of measurement The accompanying financial statements are prepared in accordance with the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the items presented on a fair value basis that are financial assets at fair value through profit or loss, derivative financial assets and liabilities held for trading purpose, available-for-sale investment securities and buildings whose fair value can reliably be measured. 7

11 2. Basis of preparation (continued) 2.3. Functional and presentation currency These financial statements are presented in TL, which is the Participation Bank s functional currency. Except as otherwise indicated, financial information presented in TL has been rounded to the nearest thousand Accounting in hyperinflationary countries Financial statements of the entities located in Turkey have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 Financial Reporting in Hyperinflationary Economies as at 31 December IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date, and that corresponding figures for previous years be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three-year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey was 35.61% as at 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute. This, together with the sustained positive trend in quantitative factors, such as the stabilisation in capital and money markets, decrease in profit share rates and the appreciation of TL against the US Dollar and other hard currencies have been taken into consideration to categorise Turkey as a non-hyperinflationary economy under IAS 29 effective from 1 January Use of estimates and judgments In preparing these consolidated financial statements, the Bank management has made judgements, estimates and assumptions that affect the application of the Group s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. (a) Assumptions and estimation uncertainties Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is set out below. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment as at 30 June 2014 is set out below in relation to the impairment of financial instruments and in the following notes: Note 5 determining fair values of financial instruments; Note 12 recognition of deferred tax assets Note 23 recognition and measurement of provisions Impairment of financial instruments The individual component of the total allowance for impairment applies to financial assets evaluated individually for impairment and is based on management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about a debtor s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. 8

12 2. Basis of preparation (continued) 2.5. Use of estimates and judgments (continued) A collective component of the total allowance is established for: groups of homogeneous loans that are not considered individually significant; and groups of assets that are individually significant but that were not found to be individually impaired (loss 'incurred but not reported' or IBNR). The collective allowance for groups of homogeneous loans is established using statistical methods such as roll rate methodology or, for small portfolios with insufficient information, a formula approach based on historical loss rate experience. The roll rate methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at on the basis of historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates are regularly benchmarked against actual loss experience. The IBNR allowance covers credit losses inherent in portfolios of loans and advances, and held to maturity investment securities with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired items but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowance, management considers factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the model assumptions and parameters used in determining the collective allowance Changes in accounting policies Except for the changes below, the Bank has consistently applied the accounting policies as set out in Note 3 to all periods presented in these financial statements. The Bank has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January Amendments to IFRS 10, 11, IAS 27 Investment entities Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 36 Recoverable amount Disclosures for Non-Financial Assets Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting IFRIC 21 Levies 9

13 3. Significant accounting policies Except the changes disclosed in Note 2.6, the accounting policies set out below have been applied consistently to all periods presented in these financial statements. Comparative amounts in the consolidated statement of cash flows change in funds borrowed amount to TL 868,220 have been presented as gross amounts under cash flows from operating activities as proceeds from funds borrowed amount to TL 2,329,005 and repayment of funds borrowed amount to TL 1,460, Basis of consolidation (i) Non-controlling interests ( NCI ) NCI are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. (ii) Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The subsidiary is presented in Note 28. (iii) Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 10

14 3. Significant accounting policies (continued) 3.1. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency, TL, of the Participation Bank at exchange rates on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies on the reporting date are retranslated to the functional currency at the exchange rate on that date. Foreign currency differences arising on retranslation are recognised in profit or loss and other comprehensive income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The official TL exchange rates used by the Participation Bank for foreign currency translation are as follows: EUR / TL USD / TL 30 June December Profit share Profit share income and expense are recognised in profit or loss using the effective rate method, except for the profit share income on overdue loans. The effective rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective rate, the Participation Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation of the effective rate includes all fees and points paid or received transaction costs, and discounts or premiums that are an integral part of the effective rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Profit share income and expense presented in the profit or loss and other comprehensive income include: profit share on financial assets and liabilities at amortised cost on an effective rate basis, profit share on available-for-sale investment securities on an effective rate basis, 3.3. Fees and commission Fees and commission income and expenses that are integral to the effective rate on a financial asset or liability are included in the measurement of the effective rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are provided. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. 11

15 3. Significant accounting policies (continued) 3.4. Net trading income Net trading income comprises gains less loss related to trading assets and liabilities, and includes all realised and unrealised fair value changes, except for the unrealised gains of available for sale securities Dividends Dividend income is recognised when the right to receive the income is established Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of profit share on the remaining balance of the liability Income tax expense Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that they relate to items recognised directly in equity or in profit or loss and other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively enacted on the balance sheet date, and any adjustment to tax payable in respect of prior years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 12

16 3. Significant accounting policies (continued) 3.8. Financial assets and liabilities Recognition The Participation Bank initially recognises loans, lease receivables and advances, deposits and funds borrowed on the date that they are originated. Regular way purchases and sales of financial assets are recognised on the trade date on which the Participation Bank commits to purchase or sell the asset. All other financial assets and liabilities (including assets and liabilities designated at fair value profit or loss) are initially recognised on the trade date at which the Participation Bank becomes a party to the contractual provisions of the instrument. Classification See accounting policies 3.9, 3.10, 3.11, 3.12 and Derecognition The Participation Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Participation Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any profit share in transferred financial assets that is created or retained by the Participation Bank is recognised as a separate asset or liability. On derecognition of a financial asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of the consideration received (including the new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. The Participation Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Available-for-sale assets and financial assets at fair value through profit or loss that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as at the date the Participation Bank commits to sell the assets. The specific identification method is used to determine the gain or loss on derecognition. Offsetting Financial assets and liabilities are set off and the net amount presented in the statement of financial position when, and only when, the Participation Bank has a legal right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Participation Bank s trading activity. Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective rate method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 13

17 3. Significant accounting policies (continued) 3.8. Financial assets and liabilities (continued) Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. When available, the Participation Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the Participation Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same and discounted cash flow analyses. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Participation Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the riskreturn factors inherent in the financial instrument. The Participation Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. Identification and measurement of impairment At each reporting date, the Participation Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. Loans and receivables are presented net of specific and portfolio basis allowances for uncollectibility. Specific allowances are made against the carrying amount of loans and receivables that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans and receivable to their recoverable amounts. In assessing the recoverable amounts of the loans and receivables, the estimated future cash flows are discounted to their present value. Portfolio basis allowances are maintained to reduce the carrying amount of portfolios of similar loans and receivables to their estimated recoverable amounts at the reporting date. In order to determine allowance rate for portfolio basis, the Participation Bank uses historical allowance rates based on its own statistical data. Objective evidence that financial assets are impaired includes observable data that comes to the attention of the Participation Bank about the following loss events: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in profit share, penalty or principal payments; the Participation Bank granting to the borrower, for economic or legal reasons relating to the borrower s financial difficulty, a concession that the lender would not otherwise consider; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or 14

18 3. Significant accounting policies (continued) 3.8. Financial assets and liabilities (continued) Identification and measurement of impairment (continued) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Participation Bank, including: adverse changes in the payment status of borrowers; or national or local economic conditions that correlate with defaults on the assets in the Participation Bank. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Profit share on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of profit share income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in other comprehensive income. The Participation Bank writes off certain loans and advances when they are determined to be uncollectible. Designation at fair value through profit or loss Financial assets at fair value through profit or loss are trading financial assets, such as equity participations, acquired principally with the intention of disposal within a short period for the purpose of short-term profit making. These assets or liabilities are managed, evaluated and reported internally on a fair value basis. 15

19 3. Significant accounting policies (continued) 3.9. Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances held with Central Bank, cash on transit and loans and advances to banks. Cash and cash equivalents are carried at amortised cost in the statement of financial position Fair value through profit or loss The Participation Bank designates some financial assets at fair value, with fair value changes recognised immediately in profit or loss and other comprehensive income statement as described in accounting policy Loans, lease receivables and advances Loans, lease receivables and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Participation Bank does not intend to sell immediately or in the near term. When the Participation Bank is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised and presented within loans, lease receivables and advances. Loans, lease receivables and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective rate method Available-for-sale investment securities Available-for-sale investments, which are initially measured at fair value plus incremental direct transaction costs, are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. All available-for-sale investments are carried at fair value. Profit share income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss. Impairment losses are recognised in profit or loss. Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the fair value reserve within equity. When the investment is sold, the gain or loss accumulated in equity is reclassified to profit or loss. A non-derivative financial asset may be reclassified from the available-for-sale category to the loans and receivables category if it otherwise would have met the definition of loans and receivables and if the Participation Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. 16

20 3. Significant accounting policies (continued) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Group acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the statement of financial position, with transaction costs recognised in profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition, except that non-derivative trading assets, other than those designated at fair value through profit or loss on initial recognition, may be reclassified out of the fair value through profit or loss i.e. trading category if they are no longer held for the purpose of being sold or repurchased in the near term and the following conditions are met. If the financial asset would have met the definition of loans and receivables (if the financial asset had not been required to be classified as held-for-trading at initial recognition), then it may be reclassified if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of loans and receivables, then it may be reclassified out of the trading category only in rare circumstances Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses except for buildings owned which are measured at fair value. Change in fair value is reflected into revaluation reserve account in other comprehensive income. Cost includes expenditures that are directly attributable to the acquisition of the asset. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognised net within the other operating income or other operating expense in profit or loss. Subsequent costs The cost of replacing a part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Participation Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. 17

21 3. Significant accounting policies (continued) Property and equipment (continued) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Buildings 50 years Office equipment, furniture and fixtures 2-15 years Motor vehicles 5 years Leasehold improvements are amortised over the shorter of periods of the respective leases and their useful lives, also on a straight-line basis. Depreciation methods, useful lives and residual values are reassessed at the each financial period-ended and adjusted if appropriate Intangible assets Software acquired by the Participation Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life of software is three to five years. Amortisation methods, useful lives and residual values are reassessed at the each financial period-ended and adjusted if appropriate. 18

22 3. Significant accounting policies (continued) Leased assets lessee Leases in terms of which the Participation Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, the leased assets are not recognised on the Participation Bank s statement of financial position Impairment of non-financial assets The carrying amounts of the Participation Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss in respect of other assets, impairment losses recognised in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised Deposits, debt securities issued, funds borrowed Deposits are the Participation Bank s main source of debt funding. Deposits of the Participation Bank comprised of the customers current and profit sharing accounts. Customers current and profit sharing accounts are initially recognised at cost. Subsequent to the initial recognition, all profit share accounts are recognised considering the attribute profits or any losses incurred on the respective loan balances. In all cases, profit/loss sharing accounts receive a proportion of the profit or bear a share of loss based on the results of the respective loan balances. Debt securities issued and funds borrowed are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Group designates liabilities at fair value through profit or loss. 19

23 3. Significant accounting policies (continued) Provisions A provision is recognised if, as a result of a past event, the Participation Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Participation Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Participation Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Participation Bank recognises any impairment loss on the assets associated with that contract Employee benefits Reserve for employee severance indemnity Reserve for employee severance indemnity represents the present value of the estimated future probable obligation of the Participation Bank arising from the retirement of the employees and calculated in accordance with the Turkish Labour Law. Employment termination benefit is not a funded liability and there is no requirement to fund it. Employment termination benefit is calculated based on the estimation of the present value of the employee s probable future liability arising from the retirement. IAS 19 ( Employee Benefits ) requires actuarial valuation methods to be developed to estimate the bank s obligation under defined employee plans. IAS 19 ( Employee Benefits ) has been revised effective from the annual period beginning after 1 January In accordance with the revised standard, actuarial gain / loss related to employee benefits shall be recognised in other comprehensive income. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Participation Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The Participation Bank does not have any internally set defined contribution plan Segment reporting An operating segment is a component of the Participation Bank that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Participation Bank s other components, whose operating results are reviewed regularly by the Participation Bank s Management Committee (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Board of Directors include items directly attributable to that segment as well as those that can be allocated on a reasonable basis. 20